Effect of Tariffs on U.S. Small Businesses

Will Aarons and Asani Sarkar

How has the recent implementation of tariffs affected small businesses? Due to lack of data, little is known about this issue. In this Liberty Street Economics post, we use data from the 2025 edition of the Small Business Credit Survey (SBCS) to explore this question for businesses nationally and in the Second District (defined, for the purpose of this study, as New York, New Jersey, and Connecticut). We find that the majority of national firms in the goods and retail sectors reported experiencing financial challenges due to tariffs in 2025, with even larger shares of regional firms doing so. In response, about 80 percent of national and regional firms passed on at least some of the higher costs of imported inputs to customers, while about 60 percent absorbed some of the costs, as many firms did some of both. Firms that faced greater tariff challenges in 2025 were more pessimistic about employment and revenues in 2026.

Exposure of U.S. Small Businesses to Imported Input Prices

While the largest 1 percent of U.S. firms account for 90 percent of international trade by value, the majority of exporting firms are small; the role of small businesses is even larger if we account for indirect exports (for example, small firms selling via online intermediaries). Among SBCS survey participants nationally, only about 30 percent of U.S. goods firms and 20 percent of retail firms reported sales to international customers in 2024. In contrast, about 70 percent of goods firms and 80 percent of retail firms reported using at least some inputs sourced from outside the U.S. in 2024, while just 40 percent of services firms did so. Regional firm surveys indicate that 90 percent of manufacturers and 75 percent of services firms import some goods. Thus, U.S. small businesses in the goods and retail sectors have a meaningful exposure to higher costs of imported inputs from higher tariff rates, even though they are far less reliant on selling to foreign customers. This point is important as input tariffs were shown to have larger effects on productivity than output tariffs.

Incidence of Tariff-Related Costs on Small Businesses

Survey participants in the 2025 SBCS edition were asked whether “increased costs associated with tariffs” and “increased cost of goods, services, and/or wages (inflation)” constituted financial challenges over the past twelve months. The chart below shows that a substantial share of small businesses reported tariff-related costs as a challenge in 2025. Nationally, the share of firms reporting tariff-related challenges was 55 percent in the goods sector, 67 percent in the retail sector and 34 percent in the services sector; for regional firms, the corresponding shares were 62 percent, 72 percent, and 44 percent, respectively.

Across all sectors, 80 percent or more of businesses reported challenges due to general cost increases, raising the concern that respondents may have potentially misattributed broad inflation effects to tariffs. Consequently, we compare answers to the tariff and inflation questions to better identify tariff-related cost pressures. In addition, we compare responses of firms in the goods and retail sectors to those in the services sector, since the former are more exposed to tariff-related costs, as shown in the section above. The chart below shows that, relative to the services sector, firms in the goods and retail sectors were more likely to be challenged by tariff- than non-tariff-related costs, indicating that respondents correctly identified tariff-related challenges.

Did tariff-related challenges result in higher imported input costs? About 80 percent of firms nationally reported that their imported input prices increased in 2025 relative to 2024. Regression results show that reporting tariff-related challenges has a high and statistically significant association with experiencing higher prices of inputs sourced outside the U.S. but reporting broad inflation challenges does not. In other words, firms with tariff-related challenges likely paid higher imported input prices in 2025. Our findings align with research showing that mid-sized firms (those with 50-499 employees) paid sharply higher tariffs in 2025.

Responding to Higher Imported Input Costs

The SBCS asked firms what actions (if any) they took in response to higher imported input prices: pass on to customers, absorb costs or take other mitigating actions (for example, change suppliers or timing of purchases or relocate production to U.S.). About 80 percent of goods and retail firms, nationally and regionally, reported passing on at least some of the costs to customers. Consistent with partial pass-through of tariff costs, about 60 percent of these firms reported absorbing at least some of the cost increases internally. Thirty-six percent of goods firms and 43 percent of retail firms nationally reported combining both approaches, while a smaller share of regional firms did so as well.

Large firms may mitigate the incidence of higher input prices from tariffs by legal means and, more generally, have greater ability to maintain price markups. Smaller, less profitable firms with fewer resources are less able to do so. Regression results show that older and more profitable small firms were more inclined to pass on costs and less inclined to absorb costs. Older firms, by virtue of having survived the early bankruptcies typical of other small firms, may have more pricing power, just as profitable firms do. Consistent with this idea, we find that older and more profitable firms were also more able to increase prices in response to weak sales.

How Did Tariff Challenges Affect Expectations of Firms’ Prospects in 2026?

Research shows that larger declines in stock prices on tariff-announcement days in 2018-19 were associated with lower profits, employment, and labor productivity in the following two years. What were firms’ expectations about their performances following higher tariffs in 2025? In the SBCS survey, firms reported their expectations for employment generation and revenue performance in 2026. We have shown previously that regional small businesses were unusually pessimistic about their 2026 prospects. We now find that national firms reporting tariff-related challenges were less likely to expect either increased revenues or employment, even after accounting for a variety of firm characteristics such as their age, revenues, profitability, and locations. In contrast, broad inflation concerns were unrelated to employment and revenue expectations. While firms’ revenue expectations relate to both domestic and export sales, small businesses report separately that, by a large margin, they expect their export sales to decrease rather than increase in 2026.

Summing Up

Small businesses in the nation and in the region are vulnerable to higher prices of imported inputs. Using survey data, we show that small businesses were particularly challenged by higher tariffs in 2025 to which they mostly responded by passing on higher tariff costs to their customers. Tariff-related challenges are associated with higher imported input costs and greater pessimism about generating employment and revenues in 2026.

Will Aarons is a research analyst in the Federal Reserve Bank of New York’s Research and Statistics Group.

Asani Sarkar is a financial research advisor in the Federal Reserve Bank of New York’s Research and Statistics Group.

 
@article{WillAaronsandAsaniSarkar2026,
    author={Will Aarons and Asani Sarkar},
    title={Effect of Tariffs on U.S. Small Businesses},
    journal={Liberty Street Economics},
    note={Liberty Street Economics Blog},
    number={July 9},
    year={2026},
    url={ https://doi.org/10.59576/lse.20260709}
}

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